On January 1, 20×1, Pep Company acquired 80% of the common stock of Sky Company for $195,000. On this date Sky had total owners’ equity of $200,000 (common stock, other paid-in capital, and retained earnings of $10,000, $90,000 and $100,000 respectively).

Any excess of cost over book value is attributable to inventory (worth $6,250 more than cost), to equipment (worth $12,500 more than book value), and to patents. FIFO is used for inventories. The equipment has remaining life of five years and straight-line depreciation is used. The excess attributable to the patents is to be amortized over 20 years.

During 20×1 and 20×2, Pep has appropriately accounted for its investment in Sky by using the simple equity method.

On January 1, 20×2, Pep held merchandise acquired from Sky for $10,000. During 20×2, Sky sold merchandise to Pep for $50,000, $20,000 of which is still held by Pep on December 31, 20×2. Sky’s usual gross profit on affiliated sales is 50%.

On December 31, 20×1, Pep sold equipment to Sky at a gain of $10,000. During 20×2, the equipment was used by Sky. Depreciation is being computed using the straight-line method, a five-year life, and no salvage value.


a. Using the information above and the worksheet below, prepare a determination and distribution of excess schedule, and related amortization of excesses.

b. Prepare journal entries for all related transactions.

c. Prepare and complete a worksheet for consolidated financial statements for the year ended December 31, 20×2.

d. Prepare, in good format, consolidated financial statements for the year including the income statement and balance sheet ended December 31, 20×2.